Impact of rise in GST

By
Task: In 2023- 2024, the rate of Goods and Services Tax
(GST) in Singapore would increase from 7% to 9%. Incomes
are projected to increase moderately in 2023 as the forecasted
growth rate in 2023 is estimated to be about +3%.
1. Explain the likely effects of this change in GST on
expenditure by consumers on different types of goods
and services.
2. If you are the economic advisor to the Singapore
government, what are your thoughts on the current
support provided to help the lower-income households
deal with the rise in GST?
1) A goods and services (GST) tax is an indirect tax. Specifically, it is an ad valorem
tax which is an indirect tax of a certain percentage of the price of the good. An
increase in GST will lead to an increase in cost of production. To maintain
profitability, firms will thus increase price by the amount of the tax at each quantity
supplied. In other words, they will decrease quantity supplied at each price which will
lead to a decrease in supply. (Refer to diagram on slide 4) This decrease in supply
will result in a shortage of QdQs at the original equilibrium price of P1. There is an
upward pressure on price as consumers compete among themselves for the good by
bidding up the price. As price increases, the quantity demanded decreases. The effect
of an increase in GST is an increase in the equilibrium price from P1 to P2, and a
decrease in equilibrium quantity from Q1 to Q2. Total tax revenue collected by the
Singapore government is indicated by area P2P3*0Q2.
Although the rise in the price will increase the consumer expenditure, the fall in the
quantity will decrease the consumer expenditure. When the supply of a good falls, whether
the consumer expenditure will rise or fall will depend on the price elasticity of demand,
which will depend on the nature of the good.
LUXURY GOOD
There are three types of goods: luxury, necessity and inferior good. A normal good is a
good whose demand rises when consumers’ income rises. A luxury is a normal good
whose demand rises by a larger proportion when consumers’ income rises. An example of
a luxury is private cars. Luxuries are generally expensive and hence the demand is likely
to be price elastic due to the large proportion of income spent on the goods. Therefore,
when the supply of a luxury falls, the quantity is likely to fall by a larger proportion than
the rise in the price and hence the consumer expenditure is likely to fall.
NECESSITY
A necessity is a normal good whose demand rises by a smaller proportion when
consumers’ income rises. An example of a necessity is agricultural products. Necessities
are generally essential goods and hence the demand is likely to be price inelastic due to
the high degree of necessity. Therefore, when the supply of a necessity falls, the price is
likely to rise by a larger proportion than the fall in the quantity and hence the consumer
expenditure is likely to rise.
INFERIOR GOOD
An inferior good is a good whose demand falls when consumers’ income rises. An
example of an inferior good is public transport. Inferior goods are generally cheap and
hence the demand is likely to be price inelastic due to the small proportion of income
spent on the goods. Therefore, when the supply of an inferior good falls, the price is likely
to rise by a larger proportion than the fall in the quantity and hence the consumer
expenditure is likely to rise.
2) the increase in GST will result in lower-income families having to spend more money
on necessities, decreasing the disposable income and thus their purchasing power. The
government is trying to cushion the impact of the GST hike by putting in place measures
such as Higher cash payout from GST Voucher Scheme, Enhancements to ComCare
Assistance, Enhanced Workfare Income Supplement, Jobs Growth Incentive extension and
Public Transport Vouchers. These measures will help the lower-income families cope with
the GST hike and have more disposable income available. However, these measures are
not long-term and thus the lower-income families will have to bear with the costs of the
GST hike by themselves one day. I suggest that the Singapore government increase the
duration for which these measures are placed to protect the lower-income families.